An individual who is badly in debt can typically file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy) or Chapter 13 (reorganization). In some cases options may also include Chapter 12 (family farmer reorganization) and Chapter 11 (reorganization of a company, or an individual debtor whose unsecured debt exceeds $400,000.00 and/or whose secured debt exceeds $1,200,000.00).
Debtors may also be forced into bankruptcy by creditors in the case of an involuntary bankruptcy, but only under Chapters 7 or 11. However, in most instances the debtor may choose under which chapter to file. In the case of an involuntary bankruptcy, the debtor may also choose to convert from the forced chapter 7 or 11 proceeding into a proceeding under another chapter.
The debtor's financial characteristics and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13, as he or she lacks the disposable income necessary to fund a viable Chapter 13 plan. Furthermore, Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligible to file under Chapter 13: unsecured debts of less than $383,175.00, and secured debts of less than $1,149,525.00.
Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3-to-5 year period. This written plan details all of the transactions (and their durations) that will occur, and repayment according to the plan must begin within 30 to 45 days after the case has started. During this period, his creditors cannot attempt to collect on the individual's previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they would, were the amount given to the debtor to continue collecting interest, allowing the debtor to find a way to pay the amount owed without losing their assets entirely.
The disadvantage of filing for personal bankruptcy is that, under the Fair Credit Reporting Act, a record of this stays on the individual's credit report for up to 7 years (up to 10 years for Chapter 7). But you may obtain new debt or credit (credit cards, Auto, or consumer loans) after 12-24 months, and can get a new FHA mortgage loan 24 months after discharge and Fannie Mae and Freddie Mac loan after 36 months. But during the pendency of a Chapter 13 case the debtor is not permitted to obtain additional credit without the permission of the bankruptcy court. Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case, Chapter 12 case or those who are in or have recently been in a Chapter 7 case.
The advantages of Chapter 13 over Chapter 7 include the ability to: stop foreclosures although a foreclosure would be reinstated upon completion of the bankruptcy; achieve a super discharge of debts of kinds not dischargeable under Chapter 7; value collateral; bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for, or are over-secured, or both, and leading to a cram down modification of the debt; prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.
Chapter 13 plan
A Chapter 13 plan is a document filed with or shortly after a debtor's Chapter 13 bankruptcy petition.
The plan details the treatment of debts, liens, and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition. In order for plans to take effect, it must meet a number of requirements. These are specified in § 1325 and include:
--providing that unsecured creditors will receive at least as much through the chapter 13 plan as they would in a chapter 7 liquidation,
--either not be objected to, repay all creditors in full, or commit all of the debtor's disposable income to the Chapter 13 plan for at least three years (or five years for a debtor who makes an above median income) Sited from Wikipedia